Before independence, many observers wondered whether an independent Montenegro could be economically viable. "Given that the economic strength of Montenegro as an independent state is uncertain, it would be better to remain a partner of an economically stronger Serbia", Dejan Corovic, deputy mayor of the coastal town of Herceg Novi, told Balkan insight. Andrija Mandic, leader of the Serbian List coalition, argued that Montenegro had to remain united with Serbia to prosper.

In fact, in the short time since independence the Montenegrin economy has been booming. Inflation has been at or below 3 percent over the past three years. Public finances have been stable. General government debt was reduced from 88 percent of GDP in 2002 to 36 percent of GDP in 2006.

The economy has benefited from a reformed banking system and tax cuts. The government has set a flat corporate profit tax of 9 percent, plus a flat personal income tax of 15 percent (to be lowered to 9 percent by 2010). This puts Montenegro on level with top tax reformers such as Slovakia or the Baltic countries.

Despite these substantial tax cuts, the 2006 government budget reached a surplus of 1.3 percent of GDP. Official unemployment has halved in four years to 14.7 percent. The presence of large numbers of foreign workers in tourism and construction suggests a growing demand for labour.

Year

GDP real growth (%)

Net FDI (EUR million)

2000

3.1

n/a

2001

-0.2

10.6

2002

1.7

86.9

2003

2.3

43.8

2004

3.7

51.8

2005

4.1

374.7

2006

6.5

466.7

Sources: World Bank, Central Bank of Montenegro

Foreign Direct Investment reached record levels in 2005 and 2006, allowing Montenegro to sustain a substantial current account deficit (29 percent of GDP in 2006). While exports have increased in the first quarter of 2007 – by 27 percent on a year-on-year basis – imports have continued to grow even faster.

At the same time, Montenegro’s industrial sector – concentrated in the two largest towns, Podgorica and Niksic, and centred mainly on aluminium, steel and electricity production – has hardly expanded since 2005. In 2005 the processing industry contributed only 8.3 percent to GDP, just as much as agriculture.

"Montenegro is going through exciting times" said the IMF in its February 2008 Staff Report: "Following bold reforms since the late 1990s and financial stabilization, the economy has finally taken off on strong tail winds from phenomenally large capital inflows and, in 2007, became the fastest growing international tourist destination. In terms of FDI Montenegro is on top of all East and South East European countries."

"Foreign direct investment in Montenegro amounted to more than € 1 billion in 2007," the Montenegro Times recently reported. International money to buy property, some of it of questionable origin, is pouring in. "Real estate sales along the country's coast were nothing short of a phenomenon in 2007.

"‘It seems that every Englishman and Russian with a million euros in the bank who has been to Montenegro has fallen in love with it and wants to come back in a yacht or buy one of the grand stone villas or farmhouses overlooking the mountains and Kotor bay,’ says one consultant at a leading foreign property company in the country," reports Richard Cowper in the Montenegro Times.